Error in Construction or a Wrong Understanding of Law?

Cockram Construction Ltd v Fulton Hogan Construction Pty Ltd [2018] NSWCA 107

In a judgment published on 21 May 2018, the Court of Appeal considered the application of section 22(3)(b) of the Building and Construction Industry Security of Payment Act 1999 (“the Act”), namely, the requirement that an Adjudicator’s determination must “include the reasons for the determination…”.

Background Facts

Cockram (subcontractor) issued a Payment Claim to Fulton (contractor) (Fulton in turn being subject to a head contract with a third party). In its Payment Schedule, Fulton asserted a set-off for Liquidated Damages (LDs). In the Adjudication Application, Cockram claimed Extensions of Time (EOTs) in answer to the LDs claim. Fulton (in its Adjudication Response) said Cockram was not entitled to EOTs and relied upon a provision in the subcontract (cl. 22.2(1)(e)) to the effect that Cockram was not entitled to be granted an EOT unless Fulton had been granted an equivalent EOT under its head contract.

Adjudication Determination

There was no issue as to the validity of any of the Payment claim, Payment Schedule, Adjudication Application or Adjudication Response. The Adjudicator determined the issue of EOTs/LDs in favour of Cockram and, relevantly, included in the Adjudication Determination the following findings regarding Fulton’s reliance upon the particular contractual term:

(in relation to each EOT claim):

EOT under the Head Contract – clause 22.2(1)(e): I do not consider that this is a legitimate condition precedent as it relies on a contract relationship, and the attendant obligations, to which the Claimant is not a party. Further, there is no information to suggest that the Respondent even sought an EOT from the Head Contractor’s Principal.

(in summary of the findings on EOT):

EOT under the Head Contract – clause 22.2(1)(e): I do not consider that this is a legitimate or workable condition precedent as it relies on a contract relationship, and the attendant obligations, to which the Claimant is not a party. Further, it appears to require the Claimant to demonstrate that the Respondent has been granted an EOT in submitting an EOT for same issue when the Claimant has no way of knowing if the Respondent has even sought an EOT from the Principal of the Head Contract.

The above were the only “reasons” given by the Adjudicator as to why, in the Adjudicator’s view, Fulton was not entitled in the Adjudication to receive the benefit of clause 22.2(1)(e) of its subcontract with Cockram. The Adjudication Determination ultimately recorded that the Adjudicator was satisfied that the Claimant had demonstrated an entitlement to each of the relevant EOTs.

Fulton was not satisfied with the outcome of the Adjudication Determination and sought to challenge the validity of the Determination, ultimately on the ground that the Adjudicator had committed a jurisdictional error by failing to comply with section 22(3)(b) of the Act.

Decision at First Instance

His Honour Justice Ball in the Supreme Court decided the matter in Fulton’s favour and found that, when reading the Adjudication Determination, it was “simply a matter for speculation why the Adjudicator thought that cl 22.2(1)(e) did not apply”. On that basis, his Honour concluded that the Adjudicator had “failed to give reasons for a critical aspect of her decision”, which constituted a failure to comply with s22(3)(b) of the Act and amounted to a jurisdictional error. The Adjudication Determination was set aside.

Court of Appeal Decision  

Cockram appealed the decision. His Honour Meagher JA delivered judgment, with which their Honours Basten JA and Barrett AJA agreed.

The Court of Appeal ultimately considered two related issues:

• firstly, whether the determination complied with s 22(3)(b) and, if not, whether it was invalid; and
• secondly, whether the adjudicator failed to perform her statutory function with respect to the condition precedent in cl 22.2(1)(e) of the subcontract.

As for the first issue, the Court found that:

• Paragraph 22(3)(b) of the Act only requires that the adjudicator’s determination “include the reasons for the determination”, not that the reasons so included be adequate according to any objective criterion.
• The relevant parts of the determination could not support an inference that the adjudicator must have relied on any further and unarticulated reason.
• Non-compliance with s22(3)(b) was therefore not made out.
• Whether the omission of any reason or reasons from an Adjudication Determination would constitute jurisdictional error does not arise, and the resolution of that hypothetical question of law would be inappropriate in this matter.

As for the second issue, the Court found that:

• The Adjudicator’s ultimate function is “to determine the amount and timing of a progress payment”: Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4; (2018) 92 ALJR 248 at [80] (per Gageler J).
• In performing that function, the adjudicator is bound “to consider” the matters in s22(2)(a)–(e) of the Act and not “to consider” other matters: Coordinated Construction Co Pty Ltd v JM Hargreaves (NSW) Pty Ltd (2005) 63 NSWLR 385; [2005] NSWCA 228 at [65] (per Basten JA).
• An Adjudicator’s obligation under s22(2) of the Act requires “a process of evaluation, sufficient to warrant the description” as consideration in the particular context, and not mere “formalistic reference” to those matters: Weal v Bathurst City Council [2000] NSWCA 88; (2000) 11 LGERA 181 at [80] (Giles JA, Priestley JA agreeing); Azriel v NSW Land & Housing Corporation (2006) 67 NSWLR 256; [2006] NSWCA 372 at [49] (Basten JA, Santow and Ipp JJA agreeing).
• The process adopted by the Adjudicator amounted could be sufficiently described as a “consideration” of the matters in s22(2)(a)-(e) of the Act and the process did not cease to warrant that description merely because it included a conclusion that one provision of the contract was not to be applied. That remained so whether or not that conclusion proceeded from an error in construction or wrong understanding of the applicable law.

The Court of Appeal accordingly allowed the appeal and the Adjudication Determination was found to be valid.

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